14.1 Introduction

A key feature of all transport services is their dependence on a dedicated infrastructure. For tourism destinations, if located at a larger distance from the home regions of their (potential) visitors, the existence of a (sufficiently dimensioned) airport is an indispensable condition for welcoming travellers. Moreover, the airport infrastructure has to fulfil certain technical and regulatory requirements (e.g. runway length, security control) as well as tourists’ expectations with respect to service quality. In addition to the airport, other air transport infrastructure facilities are needed (in particular air traffic control), but this will not be further discussed in this chapter. However, the existence of an airport is only a necessary, but not a sufficient condition for connectivity; airline services are required as well.

Traditionally, the provision of airport infrastructure is separated from the provision of airline services. In most parts of the world, both industries have gone through a process of considerable change over the last decades. The provision of air transport services has been liberalised on many domestic markets (first in the United States in 1978), in the European Union (EU) and between some neighbouring countries (e.g. Australia and New Zealand), as well as on an international level (open skies agreements). Amongst others, liberalisation has enabled new business models, in particular the rise of low-cost carriers (LCCs) (see Chapter 10). In parallel, and at least partly as a consequence of airline liberalisation, many airports have matured from ‘pure’ providers of infrastructure to market-oriented (commercialised) entities, with an increasing importance of ‘commercial’ revenues (in particular from shops and restaurants inside the airport and car parking).

This chapter deals with the relationship between airlines and airports in a liberalised and commercialised environment, paying special attention to the linkages with the tourism industry. First, the objectives of airlines and airports are discussed, in particular with respect to tourism policy. Second, basic information on different business models of airports is provided, again with a specific focus on tourism flows. The third part of the chapter deals with the route development strategies of airlines, followed by a comprehensive discussion of an airport’s options to influence these decisions. This part will cover different marketing activities as well as a large variety of financial incentives within and outside an airport’s charging scheme, referring also to the legal framework in the European Union. The next section deals with options for a (partial) vertical integration between airports and airlines. Before the conclusions, risks and opportunities from the perspective of the different stakeholders are discussed.

The chapter will elaborate on the relationship between airports and airlines in a general way, but mostly with the European situation as a reference point. Examples will be used to illustrate specific trends and the use of selected instruments, again usually referring to the European Union.

14.2 Ownership and Objectives of Owners

Although liberalisation and privatisation are two major trends in the air transport industry over the last decades, still many airports and even airlines are partially or even fully owned by states, regional bodies, and/or municipalities. Therefore a first step in analysing the relationship between airlines and airports is a discussion of ownership structures and the corresponding objectives of the respective entities.

In North America, the EU, and also some parts of Australasia, many airlines are in full private ownership. In particular, all low-cost carriers are privately owned (the only exceptions being low-cost subsidiaries of (partially) state-owned full-service network carriers). However, in Africa, the Middle East, large parts of Asia and Latin America, and even in the EU, ‘traditional’ airlines often are either fully publicly owned or have only been partially privatised.

For fully privatised airlines it can be assumed that they aim at maximising profits. On the other hand, if the government is involved as a shareholder, the airline usually will also have to consider overall policy goals. In the case of tourism destination countries this typically will include improving the accessibility of the airline’s home country for visitors from abroad (for one example, see Government of Malta, 2017). Competition with other airlines as well as budget constraints might limit an airline’s ability to serve the overall policy objectives if they are not in line with market requirements.

Regarding airports, the situation is even more complex. On a worldwide basis, most airports are publicly owned, with a share of privatised airports between 1% (North America) and 31% (Europe) (ACI, 2017). However, in particular many large- and medium-sized European airports have been fully or at least partially privatised, therefore serving the majority of passengers in Europe (for details, see ACI Europe, 2016). Moreover, there are several examples for Public–Private Partnerships, that is, a private firm investing in a state-owned airport and/or operating it. These long-term agreements can take different forms (e.g. management contracts, concessions, Build–Operate–Transfer models), but usually the contract period is limited, giving the government an opportunity to change the terms of the contract or even regain full public ownership and control. However, also for fully privatised airports the relationship with the government is crucial for airport managers, since business opportunities are heavily dependent on policy decisions, especially with respect to larger investment in runways or terminals and operating restrictions (e.g. night curfews).

In addition to (regional) employment, gross value added, and—in some cases—military functions, the major role of an airport from the perspective of policy makers is to enable connections to other regions, facilitating business as well as private travel. For leisure tourist destinations, in particular those located in regions where from a visitor’s perspective air transport is the only suitable way of travelling, an airport’s capacity and connectivity might be a limiting factor for tourism development. For example, the concession contract between the Greek government and a joint venture formed by the German airport operator Fraport and a Greek company obliges the private concessionaire to significantly expand the capacity of the 14 airports covered by the agreement (most of them located on islands) as well as to improve the quality of their passenger service facilities (Fraport, 2017). This clearly aims at enabling and attracting a larger number of tourist arrivals in the respective regions.

Several studies have analysed whether airports are operating under economies of scale (for an overview, see Lechmann and Niemeier, 2013). Although the empirical evidence is somehow mixed, at least for airports with less than three to five million passengers decreasing average costs can be assumed. Moreover, the revenues of airports with less than three million passengers often are not sufficient to make the airport profitable. For airports with less than one million passengers it is quite often not even possible to cover the operating costs. Therefore these airports usually depend on public funding, causing state aid issues which will be discussed in more detail in subsequent parts of the paper.

However, it is in the general interest of each (not capacity restrained) airport to increase passenger numbers since—given the high share of fixed costs—the additional aeronautical as well as nonaeronautical revenue contributes to increasing profits or reducing losses. A negative effect on the economic performance of an airport might only occur if either the growth in passenger numbers requires capacity enhancing investment (with additional costs exceeding additional revenue) and/or the airlines manage to capture the additional revenue by specific agreements with the airport. The second aspect will also be discussed in more detail later.

14.3 Airport Passenger Characteristics, Business Models, and Implications for Airport Management

There are several ways of defining and delineating business models of airports. With respect to the topic of this chapter, the shares of incoming and outgoing travellers matter. Especially in many ‘sun and beach’ destinations, the large majority of passengers are tourists from abroad. This may also lead to a high degree of seasonality in regions with pronounced peak and off-peak periods (e.g. the Mediterranean). Since most major cities in industrialised countries are also popular destinations for visitors (e.g. New York, London, Paris, Berlin) airports within the respective regions do not only serve a large number of business travellers but also many outgoing and incoming leisure tourists as well as other private travellers (esp. visiting friends and relatives—VFR). Finally, some cities or regions in industrialised countries may not attract a large number of (foreign) tourists, leading to a high share of outgoing travellers at the airport. Depending on these structural characteristics of demand, the different types of airports will also use specific strategies in their relations to the airlines.

The prevailing groups of passengers at an airport also determine the market shares of airlines following different business models. Before the emergence of low-cost carriers, most European tourists were flying to ‘sun and beach’ destinations on charter airlines (for the example of Faro airport in Portugal see Almeida, 2011) (see also Chapter 11). Even today, nonscheduled flights as part of a package holiday play an important role for many countries, for example, in Northern Africa (for the example of Tunisia, see Oxford Business Group 2016, p. 151). However, for Intra-European travel the emergence of low-cost airlines accompanied by new booking options for hotels and other accommodations via the internet has caused dramatic changes in the entire tourism industry (O’Connell and Bouquet, 2015). A growing number of travellers book their flights and their accommodation separately. Low air fares to a specific destination will in many cases boost demand for the destination (‘generating’ travel demand). Consequently, route decisions of LCCs and therewith also the relationship between airports and low-cost airlines have gained importance. Nowadays, many tourist destination airports are characterised by a high or even dominant share of low-cost traffic (for the example of Faro, see Almeida, 2011). Moreover, the boundary between charter airlines and low-cost carriers is blurring, since—if not restricted by bilateral Air Service Agreements—many charter airlines nowadays also sell tickets to individual passengers (leisure airlines).

In large cities and metropolitan areas the situation is different. The respective regions are usually served by traditional network carriers, charter flights, and low-cost carriers. Whereas in some regions one airport accommodates all types of airlines, elsewhere neighbouring airports concentrate on specific market segments, in particular ‘regional’ or ‘low cost’ airports with a focus on low-cost carriers. However, fundamental changes may even occur within a relatively short period of time, for example, Ryanair’s rather recent move towards serving primary and even hub airports (Dobruszkes et al., 2017).

Finally, many regional or low-cost airports located in industrialised countries outside the large metropolitan regions to a large degree depend on outgoing leisure tourists and some VFR traffic. Examples include UK airports like Bournemouth, and German airports like Paderborn-Lippstadt and Kassel.

14.4 Airline Route Policy

‘Traditional’ airlines (FSNCs) and low-cost carriers follow a totally different approach with respect to their network structure. FSNCs operate most or even all of their flights out of one (or sometimes two or even more) hub airport(s). This might also include connections to typical holiday destinations, but—since (at least on short-haul routes) these origin and destination (O&D) markets usually are rather competitive and passengers are price sensitive—a FSNC’s focus is rather on serving transfer passengers on those markets than on selling tickets to O&D travellers.

Due to specific investment, the dependence on a large local market as well as infrastructure requirements for hub operations, FSNCs are usually ‘tied’ to their hub airport(s). On the other hand, low-cost carriers often are considered to be ‘footloose’ (Humphreys et al., 2006), that is, they are serving point-to-point markets from many different airports and might rather easily switch aircraft from one route to another. Within the European common aviation market, carriers like Ryanair, easyJet, and Wizz Air operate on many city-pair markets outside their home countries and show a high degree of flexibility in opening as well as abandoning routes or even bases. Since the market segment of low-cost traffic has grown significantly over the past years, the number of newly served connections outweighs the number of routes that have been ceded. In general, larger low-cost airlines base aircraft (and crews) at several airports, leading to some stability in their network structure, but also some of those bases have been switched in the past (Malighetti et al., 2016).

From the perspective of an airline, the opening of a new route is always a trial-and-error process. Although route decisions are based on market research and demand modelling, revenue might be below forecasts and/or costs might be higher than expected. In general, in the first months or even years after the opening of a new route, its profitability is often low since (potential) passengers first have to be aware of the new travel opportunity. Moreover, an airline will have to take some investment, in particular marketing efforts. Compared to the opening of new routes, the risk of expanding services on a given route (e.g. increasing the number of weekly flights) is usually lower, but still not negligible.

14.6 Vertical Integration

The connection between an airport and an airline with the (supposedly) highest degree of stability is a (partial) vertical integration. Basically three options exist. First, the airport and the airline might have the same owner. The typical case is state ownership, for example, in Middle East countries like the United Arab Emirates, ensuring a strategic link also to the governmental tourism development organisation (Lohmann et al., 2009). It can be assumed that conflicts between the airport and the airline on the allocation of risks and opportunities are minimised in such a constellation. For example, whereas European hubs usually apply a reduced passenger charge for transfer passengers (which might be a consequence of the higher intensity of competition in the transfer market), in Dubai transfer passengers are exempted from passenger charges, providing a clear benefit for the state-owned airline (Partnership for Open & Fair Skies, 2015). In Europe there is only very limited evidence of full vertical integration. Manston airport (UK) was bought by a private investor in 1998 but did not become profitable in the following years. In 2003 the company owning the airport also acquired a low-cost airline (EUJet) which operated out of Manston. However, the entire company continued to make losses and went bankrupt in 2005 (Kent County Council, 2015).

Second, the airline might own shares of the airport (or vice versa). Whereas, to the best knowledge of the author, there is no example for an airport holding shares of an airline, there is one example for an airline having acquired minority shares of an airport (Lufthansa with Fraport, the operator of Frankfurt airport). Especially for hub airports, this vertical relation might strengthen the airline’s position in influencing decisions which will affect one of their key resources (e.g. airport expansion projects).

Third, airlines might invest in terminal or other infrastructure at an airport. In the United States, airlines and airports usually agree on long-term ‘use and lease’ contracts for terminal infrastructure (for recent developments, see Messina and Smith, 2016). In Europe, joint ventures are sometimes used, for example, in the case of Munich airport’s second terminal (with Lufthansa as the partner of the airport operator). A specific situation can be found in Bremen (Germany), where Ryanair won a public tender for operating a dedicated low-cost terminal, investing approximately 10 m Euro (Niemeier and Njoya, 2011). Joint ownership of a terminal usually requires that this part of the airport infrastructure is exclusively used by the respective airline (and—if applicable—its alliance partners). From the airline’s perspective, it is possible to influence the design of the respective infrastructure based on its specific requirements. Moreover, being shareholder of a terminal also lets the airline participate in the nonaeronautical revenues generated at this facility. From a competition policy perspective, a (partial) vertical integration also causes some concerns, since the airport might have an incentive to provide privileges to its ‘partner airline’, negatively influencing the situation of (potential) competitors (Kuchinke and Sickmann, 2007).

14.7 Discussion of Risks and Opportunities

Given the different objectives of the relevant stakeholders, there are several risks as well as opportunities associated with the design of the airline-airport relationship. First of all, the cooperation between airports and airlines (sometimes complemented by tourism development organisations and/or other regional bodies) aims at increasing passenger numbers (as a precondition for reaching other objectives). Although in many cases a traffic generation—especially due to new or extended low-cost services—could be observed, there are also examples for routes which have been ceased if they turned out to be economically nonviable. Such developments might be a consequence of changes outside the control of the cooperating entities (e.g. overall political situation), but also due to determinants which can be influenced by the airline or the airport, respectively (e.g. service quality).

If passenger numbers (or average yields) are below expectations, the type of relationship between the airport and the airline matters. If only unilateral incentives exist (e.g. discounts for new routes within the charging scheme), the airline (in particular a low-cost carrier) might ask for a higher financial contribution of the airport, reduce its capacity, or simply abandon the route. However, in case of a contract between the airport and the airline, the specific provisions matter, for example, whether the airline is only obliged to offer a certain number of frequencies or whether also passenger volumes have been agreed on. Moreover, the contract might comprise consequences in case of low passenger numbers, for example, additional payments by the airport. As stated before, the allocation of risks between the airport operator and the airline will to a large degree be influenced by the competitive situation of the airport.

Second, even if passenger numbers meet or even exceed previous expectations, some stakeholders may not benefit from this development. Many airports rely on increasing nonaeronautical revenues due to higher passenger numbers, outweighing discounts on aeronautical charges and additional payments to the respective airlines. Consequently, in case of low nonaeronautical revenues per passenger, an airport might even sustain higher losses as a consequence of increasing passenger numbers. Especially with respect to passengers travelling on low-cost airlines, two opposing hypotheses might be stated. On the one hand, it might be argued that LCCs, in general, attract a higher share of passengers with an income below average (or in general customers not able or not willing to spend much money during their vacation), resulting in low spending also at the airport. Moreover, the relatively low share of business travellers on low-cost carriers is also expected to have a negative effect on average nonaeronautical revenues. On the other hand, passengers of a low-cost airline usually pay relatively low fares, so they might be able to spend more at the airport, maybe also buying goods which they will consume during the flight (since LCCs do not offer free drinks or other amenities). In addition, some LCCs operate routes to regional airports not served by ‘traditional’ carriers. On these routes the LCC passengers might show a spending profile similar to passengers of network airlines, for example, due to a high share of VFR passengers. Empirically, Yokomi et al. (2017) show for UK airports that LCC traffic generates relatively less nonaeronautical revenue than non-LCC traffic.

Finally, even if airlines as well as airports benefit (economically) from increasing passenger numbers, the effect on tourism might be dissatisfying for the regional stakeholders. First, the share of outgoing passengers might be higher than expected. Especially in industrialised countries, some regional stakeholders were hoping for more visitors in the airport region, but passenger flows are largely dominated by outgoing travellers. Second, in spite of a large number of incoming tourists, the visitors might not stay in the airport region but continue to neighbouring regions in order to spend their vacation. Third, even if the number of tourist in the region increases, their average spending in the region may be relatively low, and/or their average stay might be relatively short (for the example of Morocco, see Dobruszkes and Mondou, 2013). With respect to passengers travelling on low-cost airlines, similar arguments might be brought forward as already stated before regarding an airport’s nonaeronautical revenue. Empirically, the various effects are difficult to capture and to distinguish. With respect to passenger numbers, Rey et al. (2011) show a positive relation between low-cost flights and the number of tourists visiting Spain but without a further regional differentiation.

14.8 Conclusions

The relationship between airports and airlines is complex. At first sight, they both aim at increasing passenger numbers. However, as long as they are not vertically integrated—like for example in the Gulf countries through state ownership—there is always a potential dispute on the distribution of risks and opportunities.

The emergence of low-cost carriers, especially in Europe but also elsewhere, complemented with improved opportunities for self-booking of hotels and other types of accommodation has led to dramatic changes in the entire travel value chain. On the one hand, LCCs have proven to be able to ‘generate’ traffic, that is, to significantly increase the number of passengers and therefore in most cases also the number of tourists. On the other hand, these low-cost carriers are not confined to serve specific airports or even countries. Therefore airports, for example, in typical ‘sun and beach’ destinations do not only compete with neighbouring airports but also with airports in similar destinations in other regions. Consequently, the negotiating power of large low-cost airlines usually is considered to be quite strong. The large number of incentives within airport charging schemes as well as other types of support for airlines newly serving or growing at an airport might serve as an indicator for this type of competition. Especially for smaller airports (regional airports as well as low-cost airports) increasing passenger numbers may not lead to reduced losses, especially if additional nonaeronautical revenues remain small or are passed through to the airlines.

Since the losses of regional and low-cost airports are mostly covered by the government, contracts between (regional) airports and (low cost) airlines have been subject to criticism and also many investigations by competition authorities. Meanwhile, regulations have been amended (at least in the EU), aiming at a lower degree of airport subsidies. Assuming that these rules will not be softened, the negotiating power of low-cost airlines could be reduced to some degree. It remains to be seen, whether this will also affect tourism flows.